SBI & Bank of Baroda take lead in lowering lending rates based on new formula

MUMBAI: State Bank of India and Bank of Baroda have taken the lead in setting lower lending rates based on the Marginal Cost Lending Rate system that will benefit millions of borrowers. However, those who have home loans may not get the benefits every quarter as rates may be reset once a year. But the flip side of it is that they wouldn’t be hurt immediately whenever the rates go up either.

The largest lender with a fifth of the market share announced MCLR rates for different tenors ranging from 8.85 per cent for overnight rates to 9.35 per cent for three years and above. The bank has pegged the home loan rates at 20 basis point over the one-year MCLR rate of 9.20 per cent.

While SBI has taken the lead, others such as Bank of India and ICICI Bank are likely to follow suit, in what could be the biggest boon for corporates struggling due to heavy interest burden. Bank of Baroda has pegged its MCLR rate in the range of 9.05 per cent for three months, 9.30 per cent for one year and 9.65 per cent for five years and above.

The measure is estimated to move as much as Rs 1.2 lakh crore of demand for funds to banks from the debt markets, says India Ratings.

"The new borrower will save about Rs 600 per month on Rs 1 crore loan," said Arundhati Bhattacharya, chairman of SBI. The reset clause of one year for home loaners is "it’s a long-term loan and quite a largish amount of SBI’s resources are in one-year bucket," she said.

RBI’s efforts to nudge banks to lower their borrowing costs may at last be bearing fruit because of this move. The central bank, vexed with the lack of transmission of its interest rate reductions to the market, forced banks to adopt this formula based on their incremental cost of funds along with operational costs thrown in instead of the average cost of funds. In fact, RBI governor Raghuram Rajan had to rubbish the claims of banks that cost of funds had not fallen terming the argument "nonsense."

Effectively, the interest rates on home loans will come down by 10 basis points for new borrowers under the MCLR formula. Thus, women borrowers would be charged 9.40 per cent against 9.50 per cent under the existing base rate formula, while other borrowers would be charged 9.45 per cent against 9.55 per cent.

In a falling interest rates scenario, if a borrower avails the loan on April 1 and if the bank decided to cut rates on April 5, the borrower will get the benefit only after a gap of one year. But at the same time, borrowers would be protected when the rates climb since even if the rates go up, the new rates would be applicable when they are due for reset.

Under the new formula, changes in interest rates would not be automatically result in revision of rates for the borrower. Here, the loan contract will have a reset clause and interest rates will be revised on the date mutually agreed between the borrower and the bank.